How RIAs Are Growing Assets as More Clients Withdraw Them

Schwab's latest RIA Benchmarking Study reveals winning strategies during the age of decumulation, which is just beginning

Jonathan Beatty of Schwab. Jonathan Beatty of Schwab.

Despite challenges from the proliferation of robo-advisors and passive investment vehicles, the RIA business is growing at a fairly brisk pace. According to Schwab’s latest RIA Benchmarking Study, the median AUM for RIAs with $250 million or more in assets grew at a 10% compounded annual rate from 2012 through 2016, to $593 million from $358 million.

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During that same period, median revenues for those firms rose at a 9% compounded annual rate, to $3.49 million from $2.282 million, and the median number of their clients grew 5.2%, to 357 from 266.

The average client size also rose, to $1.8 million in 2016 from $1.6 million in 2015.

This data is based on self-reporting from 675 firms, with assets of $250 million or more, but the entire study uses data from 1,321 RIA firms, with assets ranging from $100 million to over $2.5 billion. Cumulative assets of the firms in the study totaled $848 billion.

The growth in assets among RIAs is especially good news because “decumulation [of assets] has started to take root,” says Jon Beatty, senior vice president, sales and relationship management at Schwab Advisor Services.

The asset growth among RIA firms reflects not only what firms are doing to retain and grow the number of clients but also gains in the market. The fastest growing firms, however, added more than twice as many assets from new clients compared with other firms: 9.4% vs. 3.9%.

Referrals from current clients and relationships with other professionals such as CPAs continue to be the dominant strategy for advisors to attract new clients, but marketing plays a key role too, especially for the fastest growing firms.

They leverage social media, have a “robust web presence,” host events in their communities and play a part in charitable organizations, according to Beatty.

“The fastest growing firms have a culture that starts at the top," Beatty tells ThinkAdvisor. "That culture drives engagement with the community, which fuels the reputational marketing that creates entrée into centers of influence and referrals from existing clients.” Centers of influence are professionals in other fields, such as attorneys and accountants, who can connect advisors with potential clients.

Firms are also increasing their AUM by focusing on back-office services to create scale and efficiency and adding services for clients without charging additional fees.

“A lot of firms are choosing to take the scale and efficiency they get and reinvest that into additional services for their clients as opposed to achieving higher margins,” says Beatty. “The good news is that firms are not taking a hit to their margins as they aspire to offer add other services to maintain their differential.” In other words, they’re choosing to differentiate themselves more on services than on lowering their fees.

The median standard operating margin for RIAs participating in the benchmark study was 25%, with a range between 20%, for firms with assets up to $250 million, to almost 31% for firms with over $2.5 billion in assets.

Talent is another way that firms are choosing to differentiate themselves and firms "that can show a propensity to grow beyond what the market is providing" are best able to attract that talent, according to Beatty.

Indeed, according to the Schwab benchmarking report, 96% of firms with assets over $1 billion expect to add relationship managers or investment professionals this year compared with 60% of firms with assets of $250 million or less and 71% of firms with assets between $500 million and $750 million.

Schwab will be watching the competitive environment for RIAs as more clients retire and withdraw assets from firms to live on. “If advisors don’t have the means to replace those clients with new ones, they’re at risk for declining asset value over time,” says Beatty. “We’re keeping an eye on the competitive environment and on what happens to fees.”

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